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Beam and Diageo: Which Booze Stock Is Top Shelf?

Sure one's bigger than the other, but is that all that matters?

Picking a booze stock is a lot like picking an actual liquor to drink at a bar. There's the really cheap offering that tastes terrible, the crazy expensive stuff that actually isn't as high quality as you'd think, and if you're lucky, that perfectly blended combo of both quality and price.

Two boozy companies that tend to get noticed on the stock market are Beam (UNKNOWN:BEAM.DL) and Diageo (NYSE:DEO), the name behind spirits like Smirnoff. While one stock is much smaller than the other, that doesn't necessarily speak to the quality of either company as an investment. Which company could your portfolio use a shot of, and which should be left on the shelf?

State of the companyJust like liquor itself, it can be useful to know the exact origin of a booze stock purchase. In that regard, the past couple of years have been shaky ones for Beam- the company was the result of consumer brands business Fortune Brands renaming itself in October 2011, in order to become a pure-play spirits business. Fortune's home and security division was consequently spun off into its own company. Since that fateful decision, Beam has seen its price per share rise 48%, from $46.05 to $68.59.

Diageo, meanwhile, was created in 1997 , but sold off all its food assets (including Burger King and Pillsbury) in 2000 to become a company singly focused on spirits and premium drinks. Since then, the company has seen its stock price grow from $30.18 at the end of January 2000, to $127.59, an increase of 322%.

Taking on vs. letting goAnother important factor to consider is a company's recent history of acquisition or divestiture. One can mean a company is strong enough to be a "big fish," swallowing smaller ones in its path, while the other can suggest a company is just barely treading water and needs to unload assets to stay afloat.

On the acquisition front, Beam hasn't been doing too badly, but the company is no stranger to editing its purchases. After acquiring Pinnacle Vodka from White Rock Distillery in April 2012, Beam recently sold a previously Pinnacle-owned bottling plant in Maine to spirits company Sazerac Co. This doesn't mean Beam is heading for trouble, but a solid acquisition (or several) could help grow the company's market cap to rival Diageo.

Speaking of Diageo, the company announced plans in July to acquire the total amount of shares it didn't already own (47%, worth $375.1 million) in Chinese holding company SJF Holdco. The move gave Diageo a huge foothold in the Chinese market, while many a US competitor turned green with envy.

That said, being a big fish doesn't mean Diageo is immune to losing key assets. In December, the company's agreement with tequila-synonym Jose Cuervo was terminated, and the resulting revenue hole threatened to flat line Diageo's sales for last quarter. Regardless of capitalization, losing the wrong asset at the wrong time can still throw a company for a loop.

Financial situationIn terms of quarterly reports, Beam and Diageo have been telling some contrasting stories lately. Diageo's last earnings call was in July, but the company released an "interim management statement" regarding its last quarter on Oct. 17. According to that release, the boozy business's organic net sales were up 3.1%, thanks to particular growth in the U.S. and Latin America. Sales growth is a positive sign at any time, but in Diageo's case, it was especially encouraging after the Cuervo termination agreement.

Beam's latest earnings call, meanwhile, wasn't exactly as promising as investors would have hoped. The liquor company reported a 4.4% drop in net sales last quarter, with CEO Matthew Shattock pinning the blame on product shipments being "adversely affected by several timing-related factors."

Shattock later said he expected Beam to deliver solid growth throughout the end of the year, but the damage appeared to have already been done. Between Oct. 29 (two days before the call) and Nov. 1 (the day after the call), Beam's stock price dropped 4.6%, although it has begun a slight rebound since then, to $68.59 on November 6th. In the category of most recent earnings updates, Beam appears to be the loser, at least for now.

Evaluate the valuationsDiageo may have beaten Beam in the latest quarterly earnings battle, but there's another one that can be just as important: valuations. Since Diageo is so much bigger than Beam, it could have a huge P/E and thus be possibly overvalued, right?

Not necessarily. The spirits industry currently has an average P/E of 14.5, and both companies currently shoot well above that. Diageo is currently trading at approximately 20.3 times earnings, while Beam breaks ahead even further with a 26.5 PE.

There are two ways either ratio could decline- their share price could drop, or their EPS could grow faster than the share price. The reverse, of course, is true for potential P/E growth- if Beam or Diageo's stock prices swell, and their EPS either stays the same or shrinks, either could be headed for an even larger ratio.

What's your flavor?Diageo works for investors who prefer to own the larger companies of an industry, with bigger market cap and earnings than many of its competitors. Even the king of the mountain faces some setbacks, but Diageo appears to be doing fine even after its Cuervo loss.

Beam, meanwhile, is the would-be growth story of the two. The company's smaller size suggests it has more room to expand on the surface, but after its latest quarterly results this growth isn't exactly happening as quickly as the company (or investors) would like. One quarter does not generally make or break a company, of course, and come Q4, Beam could very well turn the beat back around in its favor.

Perhaps infuriatingly, deciding the superior of these two companies depends almost completely on the eye of the investor. If you're looking for the king of the heap, try a shot of Diageo, but if you're after a story with more room to expand, you might want to make it a Beam.